Sunday, June 30, 2013

FIFA World Cup - Everybody Wants To Rule The World

The article below covers the financial impact of the 2010
World Cup in South Africa and was first published a couple of years ago in
Issue One of The Blizzard, the thinking fan’s football magazine of choice.

Each issue can be purchased on a pay-what-you-like basis and
includes some of the finest writing in the world of football, so I would
encourage you to visit their website and invest some of your hard-earned cash.
Trust me, you won’t be disappointed.

Although this is an old piece, I thought that it might be
worth republishing on my blog, as it seems very timely given the recent
criticism aimed at FIFA over the money it will make from the World Cup in
Brazil – in stark contrast to the billions invested by the host country. As you
will see, many of the concerns are nothing new and would surely find resonance
with many of the South African people.

When Iker Casillas raised the World Cup trophy in Johannesburg’s
Soccer City last July, everyone congratulated Spain on their victory, but
arguably the man who gained most from the tournament was the one standing next
to him, beaming with pride. That man was Joseph “Sepp” Blatter, the
long-standing President of FIFA, whose bold decision to award the most
prestigious competition in world football to South Africa had paid off – in
every sense.

Blatter could be forgiven for heaving a huge sigh of relief,
as his organisation had to a certain extent gambled when deciding to take the
World Cup (excuse me, the 2010 FIFA World Cup™) to Africa for the first time.
Many experts had confidently predicted that FIFA would make a loss on the event
in contrast to the large profits generated in Germany in 2006, but the results were
fantastically good off the pitch, even if some of the football on display was
disappointing.

Last year’s accounts revealed that total revenue for the
four-year cycle from 2007 to 2010 had increased a very impressive 65% to $4.2
billion, leading to a healthy surplus of $631 million that allowed FIFA to
increase its reserves to a record level of $1.3 billion. Little wonder that
Blatter reacted with his customary satisfaction, “I am the happiest man. It’s a
huge, huge financial success.”

Although Blatter spoke movingly in Soccer City of “a dream
coming true” and “the spirit of Mandela”, he had revealed his priorities a few
weeks earlier when he boasted that FIFA’s excellent financial report justified
awarding the World Cup to South Africa as a “good financial and commercial
decision.” You can say that again.

The World Cup is clearly the jewel in FIFA’s gilded crown,
providing the vast majority of its revenue and profits. In fact, 87% ($3.7
billion) of their turnover is derived from one of sport’s “greatest shows on
earth”, which resulted in a considerable profit of $2.4 billion for the event.

Great stuff, but, as all football fans know, for every
winner, there has to be a loser and in this case it was the host country – at
least from the financial perspective. The World Cup was a great deal for FIFA,
as they pocketed the lion’s share of the massive sums raised by the sale of TV
rights and sponsorship deals, while South Africa had to foot the colossal bill
for infrastructure improvements, which was estimated at $3.5 billion by the
South African Public Service Commission.

In fairness, FIFA did provide $526 million to the Local
Organising Committee, including $226 million in direct support and $300 million
from ticket sales, but this is small change compared to the money needed to
fund new stadiums, improved transport networks and better security. The cost
would have been lower if FIFA had accepted the South Africans’ plans to revamp
exiting stadiums, but instead they forced the locals to build expensive state-of-the-art
facilities in order to project the right image for their tournament (and their
corporate sponsors).

This financial imbalance has given the expression “a game of
two halves” a whole new meaning in Johannesburg, though it should maybe be
tweaked to “a game of haves and have-nots”. Looking at the figures makes one of
Blatter’s outbursts before the World Cup seem even more bizarre, “Colonialists
over the past 100 years have only gone to Africa to exploit it, to take out all
the best things. There’s no respect. FIFA is giving back to Africa.”

"Golden Years"

While admiring FIFA for taking the risk of breaking new
ground in staging the World Cup in Africa, it is evident that it managed to
reduce the dangers to its bottom line as much as possible. The media and marketing
revenue that they keep is contracted well in advance, while the ticketing
income that is allocated to the host country is the only uncertain revenue
stream. On top of that, the billions of dollars worth of playing talent is
provided by football clubs free of charge. OK, it’s not quite free, but the
compensation from FIFA, described as “a share of the benefits” was a derisory
$38 million.

To be fair to our friends in Zurich, FIFA’s financial
success is almost totally dependent on the successful staging of the World Cup
and the profits from this event have to cover all their expenses over for the
four years in between tournaments, as explained by General Secretary Jérôme
Valcke, “We are not rich. We are making quite good money thanks to the World
Cup, but that’s the only money we have.”

A key executive obviously has a vested interest in
under-playing their large profits, but the independent analysts Sportcal have
supported this view, “FIFA is quick to point out that its profits from the
World Cup go towards funding its many other activities over the four-year cycle
between World Cups, including less lucrative competitions such as junior and
women's World Cups and the quadrennial Confederations Cup between continental
national teams champions.”

These tournaments tend to make losses, which are only
covered by the profits from FIFA’s flagship competition. For example, in the
last two years, FIFA incurred significant expenses of $223 million for other
events, including the Confederations Cup in South Africa ($44 million), the
U-17 World Cup in Nigeria ($43 million), the U-20 World Cup in Egypt ($21
million) and the U-20 Women’s World Cup in Germany ($21 million) plus many
others.

Back to the money-making machine, FIFA’s largest revenue
element is the sale of television rights, which has increased by an astonishing
85% for this World Cup to $2.4 billion. A good example of the growth came from
improved contracts in the USA with the Walt Disney company (which owns ABC and
ESPN) and Univision paying a combined $425 million for exclusive broadcasting
rights for 2010 and 2014, about three times the combined bids last time.

These are considerable sums of money, but the television
companies do get a lot of bang for their buck. According to FIFA, more than 26
billion viewers watched the World Cup. As Kevin Alavy of international
analysts, Initiative Futures Sport + Entertainment, said, “No other media
property delivers the same spikes in audience delivery, day after day,
sustained over a month as the World Cup.” FIFA expected more than 700 million
viewers to watch the final, which would make it the most watched live televised
event in history – surpassing the Beijing Olympics opening ceremony in 2008.

FIFA’s second largest source of income comes from the
marketing of the World Cup rights, which has virtually doubled to $1.1 billion.
The new commercial strategy of classifying marketing partners into three
categories (Partner, World Cup Sponsor and National Supporter) has been a great
success.

Partners enjoy the highest level of association with FIFA,
which means that they own international rights to a broad range of FIFA
activities as well as exclusive marketing assets. The six partners are Adidas
(responsible for the Jabulani
ball), Coca-Cola, Emirates, Hyundai, Sony and Visa, paying an annual fee of
$24-45 million for the privilege. The eight Sponsors, including the likes of
McDonald’s and Budweiser, pay $10-25 million a year over the same period, but
their rights are limited to the World Cup. The lowest tier, National Supporters,
pay $4.5-7 million a year, but their rights are only available in the host
country.

"A load of balls"

As Blatter said, “Although we are in challenging financial
times, multinational companies still seek to identify with football in general
and with the FIFA World Cup in particular.” Indeed, Coca-Cola, McDonald’s and
Budweiser all claimed that their costly sponsorship had proved a resounding
success, boosting sales.

Before we get too carried away with the idea that FIFA is
full of commercial geniuses, it is worth noting that after Visa signed their
$200 million sponsorship deal in 2006, the former partners MasterCard sued them
for breaching their agreement, before reaching a settlement out of court. As
usual, Blatter glossed over this minor inconvenience, “We managed to end the
contractual dispute with MasterCard, thus opening the doors to partnership with
Visa and completing our pool of partners”, conveniently failing to mention that
the resolution cost FIFA more than $90 million.

Similarly, the collapse of FIFA’s former marketing partner
ISL (International Sport & Leisure) in 2001, leading to losses of at least
$42-46 million, was recently presented by Blatter as beneficial to the
organisation, “It was for us, I would say, a very positive moment. We are masters
of our own rights and we do not need any agency to work for FIFA. Our partners
like the direct contact with us.” Right. You get the impression that he only
just stopped himself from saying “masters of the universe” à la Bonfire of the
Vanities, but he’s probably correct to cut out the middle man, even though the
circumstances were not the cleanest.

FIFA goes to extraordinary lengths to defend its rights,
which culminated in 36 female fans being ejected from the match between
Netherlands and Denmark for wearing figure hugging short orange dresses that
were part of an “ambush marketing” campaign by a Dutch brewery. This
heavy-handed approach was condemned as ridiculous by a company representative,
“FIFA does not have the monopoly on orange.”

"Walk on by"

In fairness, FIFA does need to generate a lot of money to pay
for its vast cost growth. Total expenses for the latest four-year cycle
amounted to $3.6 billion, which represents an 87% increase over the $1.9
billion in the previous period – even higher than the 65% revenue growth.

Almost half of the expenses are event-related at $1.7
billion, most of which were for the World Cup, including prize money of $380
million. The winners pocketed a cheque for $30 million with $24 million going
to the runners-up. Every team at the World Cup received at least $9 million: $1
million as a contribution to preparation costs plus $8 million even if they
were eliminated at the group stage.

FIFA is keen to emphasise that the majority of its
expenditure is on football, though it would be fairly surprising if that wasn’t
the case. Valcke stressed this, “Just to be clear, we are not sitting on
profit. All the money is going back to football.” In fact, the accounts note
that 70% of overall expenditure was invested directly in football – defined as
the World Cup, other events and development.

This is entirely consistent with FIFA’s stated objective of
“organising international competitions as well as constantly improving and
promoting football.” Of course, that’s not enough for President Blatter, who
went much further in a recent magazine article, when he pompously wrote, “FIFA
is no longer merely an institution that runs our sport. It has now taken on a
social, cultural, political and sporting dimension in the struggle to educate
children and defeat poverty.”

So how well has FIFA done in its attempt to emulate Mother
Theresa? To be fair, they dedicated $794 million to the development of football
in the latest four-year period. Indeed, they take great pains to highlight the
fact that spending on development programmes in 2007-10 was 57 times greater
than the $14 million in 1995-98. Impressive stuff, but I can’t help noting that
total expenses have risen by $1.6 billion since the 2003-06 period with only
$0.4 billion of this increase attributed to development.

It’s difficult to know how to react to this. On the one
hand, there is no doubt that FIFA has spent a lot on development, but on the
other hand, there is a feeling that it could have done a lot more with the
funds available. Although there is no shortage of worthy-sounding projects, it
does feel a little like this merely camouflages the relatively low investment
and certainly not enough to support Blatter’s outlandish claims, “We resolved
to instigate a range of projects designed to aid the entire African continent.
Football is a force for change. For Africa, for the game, for the world.”

"Hands off... it's mine"

The snappily titled “Win in Africa with Africa” initiative
is designed to leave the continent with a proper football legacy, including
laying many artificial pitches, and has a hefty $71 million budget, but other
projects seem to attract more scepticism. Any observer of last year’s World Cup
could not have avoided “20 Centres for 2010”, a laudable project to build
Football for Hope Centres in African communities, but the sad truth is that
only four had been completed by 2010.

Then there’s the Goal programme ($120 million over four
years), which was set up a year after Blatter first became president to finance
development projects around the world. Again, no reasonable man could condemn
its objectives, but this initiative is widely regarded as the means by which
votes are secured in the presidential election.

Similarly, the Financial Assistance Programme provided $209
million to the member associations so that they may “finance development
activities and football activities.” This is serious money for many of the
poorer nations, but just in case they were feeling the pinch last year FIFA
found another $144 million to make an extraordinary FAP payment ($5 million to
each confederation and $550,000 to each member association). Blatter smilingly
explained, “It is a gift, if we can say this.” While others might find
different words to describe these payments, Blatter was unperturbed, “The whole
family of football is happy.”

Blatter has frequently declared that FIFA can make a
difference, but I would suggest that it could have an even stronger impact if
it cut back its own costs. After all, the organisation spends more on itself
($0.9 billion) than football development ($0.8 billion), if you include $0.7
billion operating expenses and $0.2 billion for “governance” (mainly congress
and committees).

This will come as no surprise to those who have seen FIFA’s
palatial new offices in Zurich, which cost around $200 million. Of course, we
cannot say whether FIFA’s 387 employees are over-paid, as they do not publish
details of their salaries, but what is clear is that they are handsomely
rewarded for their efforts, as the annual wage bill of $65 million implies an
average salary of $169,000 — an inflation-busting increase over 2009 of 23%.

That’s pretty good, but pales into insignificance next to
the 56% increase achieved by the 24 members of the Executive Committee, who
shared $33 million between them (an average of $1.3 million). How on earth can
they incur so many costs? The Guardian gave a clue last year when they revealed
that Executive Committee member Vitali Mutko had managed to claim expenses for
five breakfasts a day during a 20-day trip to watch the Winter Olympics.

FIFA is classified as a non-profit organisation in
Switzerland, though, as we have seen, it has a highly commercial outlook, e.g.
it has its own official range of FIFA branded merchandise. Its status allows it
to enjoy a tax-free lifestyle, though this does oblige it to spend its profits
on fulfilling its football objectives. This is probably why they do not
describe the surplus from the World Cup as profit, but as a “result” to be
added to reserves to insulate the organisation from any unexpected events that
may arise.

Fair enough, but do they have to sit on quite so many
reserves? From $76 million in 2003, they have risen every year since and now
stand at $1.3 billion, a level FIFA describe as “solid”, while others might
call it obscene. Franco Carraro, chairman of the internal audit committee,
defended this amount, “While equity of over a billion dollars seems high, it is
necessary as the financial risks exceed it many times over.”

The biggest risk to the financial position would clearly be
the cancellation of the World Cup, as almost all contracts with commercial
partners are related to this event, so FIFA has an insurance policy in place.
However, since 9/11, it has been practically impossible to fully cover the
risk, so their $650 million policy now only covers the cost of postponement
and/or relocation of the event in the case of natural disasters, war and acts
of terrorism. As the event’s cancellation is not fully covered by the
insurance, it would have to be compensated by FIFA’s own reserves, so the
caution is understandable to a certain extent, but they could still spare more
money on developing the game.

Or they could give the poor host country some more cash,
which in fairness they have done via an additional $100 million contribution to
a Legacy Trust, so that “South Africans would continue to benefit from the 2010
tournament long after the final whistle had been blown.” However, as we have
seen, this is a drop in the ocean compared to the massive cost of hosting the
event.

"Free Nelson Mandela"

The South Africans do not share in the colossal television
or marketing deals - the World Cup’s main money-spinners – and their only
direct funding comes from the predetermined contribution from FIFA and net
revenue from ticket sales.

Around three million tickets were made available for the 64
matches of the World Cup and while FIFA’s eternally optimistic general
secretary, Jérôme Valcke, claimed that the tickets were 97.5% sold out, anybody
with a pair of functioning eyes would have witnessed many empty seats in the
sparkling new stadiums. This has been attributed to poor transport systems, but
there is a suspicion that many tickets were sold to international agencies who
were simply unable to shift them.

Even Valcke had to admit that FIFA had made mistakes in its
ticketing procedures, most notably granting the Match agency the exclusive
rights to sell tickets for the 2010 and 2014 tournaments. The high commission
charged by Match to travel agents and hotels has been a spectacular failure,
which should cause Sepp Blatter some discomfort, as the company is part owned
by his nephew, Philippe.

As a popular supermarket’s advertising campaign would say,
every little helps, but the South African government spent considerably more
preparing its country for this footballing extravaganza. They incurred major
costs on building five new stadiums and refurbishing the same number, while
every aspect of their transport network has been upgraded, including a new
international airport in Durban and a high-speed train link between Johannesburg
airport and the city centre. Even though FIFA has thrown a few meaty scraps
their way, there is understandable resentment in South Africa that FIFA made so
much money while their own country ends up with a huge debt.

Clearly, some of this expenditure will deliver a legacy of
sorts to the rainbow nation, but the most visible examples of this investment
are the stadiums, which have been described as white elephants, due to the
unhappy combination of high running costs and small crowds, leading to their long-term
financial viability being questioned.

Of course, it is difficult to place a monetary value on the
boost to the country’s self-image arising from hosting such a global festival,
though former South African president Thabo Mbeki suggested that the 2010 World
Cup would be the moment when the African continent “turned the tide on
centuries of poverty and conflict.” Archbishop Desmond Tutu was even more
lyrical in his enthusiasm, “We are the caterpillar that has become the
beautiful butterfly.”

"Smile like you mean it"

There’s no doubt that many were galvanized by this feel-good
factor, but some of the country’s residents managed to resist the World Cup’s
charms such as the outraged Sowetan journalist who complained, ““The World Cup
is a colonial playground for the rich and for a few wannabes in the South
African elite.”

In addition, local street vendors did not appreciate FIFA’s
strong-arm tactics in protecting their precious brand, while the limited
availability of tickets for Africans was another source of anger, as the lack of
internet access and credit card ownership presented difficulties for online
purchases.

The current South African president Jacob Zuma was rather
more pragmatic than his predecessor, “we have an opportunity to promote foreign
investment, tourism and trade”, as he focused on the boost to South Africa’s
image worldwide.

In the past, host countries have relied on growth in tourism
to help compensate the additional costs, but this tournament failed to attract
as many foreign visitors as expected. Marthinus van Schalkwyk, South Africa's
tourism minister, said just 309,000 foreign fans attended the tournament,
compared to predictions of 450,000.

"FIFA HQ - Welcome to the House of Fun"

In fact, many now believe that the economic benefits of
hosting major sports events are limited. Stefan Szymanski, co-author of the
respected “Soccernomics” book, pointed out the opportunity costs to an economy,
“The gain in sport is a loss on spending in cinemas.” While criticising FIFA’s
excessive expenditure, he asserted, “There’s so much evidence that there’s not
even an argument any more – mega events don’t deliver the financial
extravaganza that is promised.”

Highly paid consultants always produce ludicrous
over-estimates of the financial gains arising from such events, safe in the
knowledge that it’s almost impossible to calculate the real impact. In 2004
when FIFA awarded the World Cup to South Africa, Grant Thornton predicted an
uplift in Gross Domestic Product of $2.9 billion, but growth actually slowed
during the two quarters covering the tournament. John Saker, chief operating
officer of KPMG Africa, confirmed: "The big boost didn't happen.”

So why do so many countries desperately want to host the
World Cup? Apart from the unsound economics, you have to ask why anyone would
want to go through such a humiliating, squalid process, where corruption and
collusion appear to be the order of the day.

"The winner takes it all"

During the bidding for the 2018 and 2022 World Cups, FIFA
suspended two members of its executive committee, Nigeria’s Amos Adamu and
Tahiti’s Reynald Temarii, after both were filmed by the Sunday Times allegedly
trying to sell their votes. Apart from the two members caught on camera, FIFA’s
Executive Committee features other disagreeable characters, so a bidding
country’s great and good also have to suck up to the likes of Jack Warner, the
infamous president of CONCACAF, whose previous record brings to mind the old
saying that if you dine with the devil, you should bring a long spoon.

And if a country somehow manages to win the bid, then it has
to suspend a number of its laws for FIFA, including “comprehensive tax
exemption”, unrestricted entry visas, no limit on import and export of cash and
free public transport on match days. All in all, it could be argued that the
taxpayers in the countries that missed out have had a narrow escape.

Those expecting change anytime soon should not hold their
breath. Yes, FIFA has an ethics commission, but three months ago, a leading
German lawyer resigned from thisgroup in protest at the apparent failure of the governing body to tackle
alleged corruption in its ranks.

"U Got the Look"

Of course, there might be a change at the top this year, as
Blatter is facing a challenge in the presidential election from Mohammed Bin
Hammam, the president of the Asian Football Confederation, who promises to make
FIFA more transparent and less bureaucratic. However, he is a long-term FIFA
insider and also wants to double future payments from the Financial Assistance
Programme, which, as we have seen, is something of a double-edged sword.

In the meantime, Blatter continues to hold the reins and he
has no doubts over the success of the World Cup in South Africa, “2010 was a
love story. A love story between the African continent and me.” That may be
true, but it was a very one-sided relationship, and the South Africans might
just beg to differ with the most powerful man in football.

As a postscript, since this article was originally
published, FIFA’s reserves have continued to grow and now stand at a mighty
$1.4 billion.

Their last annual report confirmed that FIFA continued to spend
more on itself in 2012 ($241m, comprising $188 million operating expenses $53
million of governance) than football development ($177m). These “governance”
costs included $32m on committees & congress (i.e. meetings) plus $21m on legal
matters.

The annual report also revealed that in 2012 FIFA’s
personnel costs rose from $89 million the previous year to $91 million (with key
management up from $29.5 million to $33.5 million), while development was down
from $183 million to $177 million.

Too much money involved, too much hypocrisy, too much fatty asses asking for bloods... and the next World cup festive in Brazil will left its country host dries down.. and the crying lullabies of those who're left with nothing will be covered up by the sound of Blatter victory...

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I think that one of the key things for South Africa is whether they can earn revenues in the next 20 years from using the stadia built for profitable events.

For example: can they host a future Rugby World cup and use those stadia without need to build any others?? If they could make £50m from that, that would help.

Can they host a few matches of top European Clubs each summer, allowing them to revenue share with those clubs?? If they could get 10 million a year for 20 years, that would help.

Can they make a profit from hosting the African Nations Cup?? I dunno, but if they could, that might help.

I do think that the model of FIFA needs to change, since all the costs are loaded on the host country and all the profits go to FIFA. My take is that, if you host in a country like Germany, England, France etc, the benefits to the national game from upgrading stadia are clear, so benefits accrue down the line from increasing stadia sizes. It's less clear in a developing nation, so the revenue sharing from the tournament should be far greater.

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